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Implicit Cost

Definition

In economics, an implicit cost, also called an imputed cost, implied cost, or notional cost, is the opportunity cost equal to what a firm must give up in order to use a factor of production for which it already owns and thus does not pay rent. It is the opposite of an explicit cost, which is borne directly. In other words, an implicit cost is any cost that results from using an asset instead of renting it out or selling it. The term also applies to foregone income from choosing not to work.

Implicit Cost

What is an 'Implicit Cost'

An implicit cost is any cost that has already occurred but is not necessarily shown or reported as a separate expense. It represents an opportunity cost that arises when a company allocates internal resources toward a project without any explicit compensation for the utilization of resources. This means that when a company allocates its resources, it always forgoes the ability to earn money off the use of the resources elsewhere.

Explaining 'Implicit Cost'

Examples of implicit costs include the loss of interest income on funds, and the depreciation of machinery for a capital project. Implicit costs can also be intangible costs that are not easily accounted for, such as situations in which an owner allocates time toward the maintenance of a company, rather than allocating those hours elsewhere. In most cases, implicit costs are not recorded for accounting purposes.

Difference Between Implicit and Explicit Costs

Implicit costs are technically not incurred and therefore cannot be measured accurately for accounting purposes. There are no cash exchanges in the realization of implicit costs. However, they are important costs to ascertain because they help managers make effective decisions on behalf of the company.


Implicit Cost FAQ

What is implicit cost?

An implicit cost is any cost that has occurred but not necessarily recorded separately. It represents an opportunity cost arising when a company uses internal resources for a project without appropriate compensation for how the resources were used.

How do you calculate implicit cost?

CALCULATING IMPLICIT COSTS Firstly, calculate the costs. Total what you know about explicit costs: Subtract the explicit costs from the revenue, which is the accounting profit. Revenues. Subtraction of both the explicit and implicit costs determines the true economic profit.

Why do economists look at implicit costs?

Implicit costs shows the sacrificed value of using a company's scarce resource in a particular way. Generally, accounting profit is the difference between total revenues (sales) and total explicit costs. Economists picks more interest in economic profit because it consists of implicit costs.

Can accounting profit be positive while economic profits are negative?

It is possible, if explicit costs are covered by the total revenue but not opportunity costs.

What is an example of economic profit?

Economic profit is the profit from producing goods and services while considering other ways to use a company's resources. For example, the implicit costs could be the market price a company sells a natural resource against using that resource. A paper company owns a forest of trees.

Further Reading

Taxes, M‐M propositions and government's implicit cost of capital in investment projects in the private sectorTaxes, M‐M propositions and government's implicit cost of capital in investment projects in the private sector
onlinelibrary.wiley.com [PDF]
… the investment decision of corporations was the subject of a conference on 'The Economic War among … 18 Under the same conditions and assumptions the government's implicit cutoff rate for the marginal investment … the cutoff rate for equity holders will be the firm's cost of capital …

Explicit and implicit cost of changes in the level of accounts receivable and the credit policy decision of the firmExplicit and implicit cost of changes in the level of accounts receivable and the credit policy decision of the firm
www.jstor.org [PDF]
… the investment decision of corporations was the subject of a conference on 'The Economic War among … 18 Under the same conditions and assumptions the government's implicit cutoff rate for the marginal investment … the cutoff rate for equity holders will be the firm's cost of capital …

Discount window borrowing after 2003: The explicit reduction in implicit costsDiscount window borrowing after 2003: The explicit reduction in implicit costs
www.sciencedirect.com [PDF]
… the investment decision of corporations was the subject of a conference on 'The Economic War among … 18 Under the same conditions and assumptions the government's implicit cutoff rate for the marginal investment … the cutoff rate for equity holders will be the firm's cost of capital …

The impact of capital requirements on banks' cost of intermediation and performance: The case of EgyptThe impact of capital requirements on banks' cost of intermediation and performance: The case of Egypt
www.sciencedirect.com [PDF]
… the investment decision of corporations was the subject of a conference on 'The Economic War among … 18 Under the same conditions and assumptions the government's implicit cutoff rate for the marginal investment … the cutoff rate for equity holders will be the firm's cost of capital …

Is management accounting just what management accountants do? Implicit cost analysis on Britain's railways c. 1923-1939Is management accounting just what management accountants do? Implicit cost analysis on Britain's railways c. 1923-1939
www.tandfonline.com [PDF]
… the investment decision of corporations was the subject of a conference on 'The Economic War among … 18 Under the same conditions and assumptions the government's implicit cutoff rate for the marginal investment … the cutoff rate for equity holders will be the firm's cost of capital …

Equity Financing Preference of Listed Companies: Analysis Based on Explicit and Implicit CostEquity Financing Preference of Listed Companies: Analysis Based on Explicit and Implicit Cost
en.cnki.com.cn [PDF]
… the investment decision of corporations was the subject of a conference on 'The Economic War among … 18 Under the same conditions and assumptions the government's implicit cutoff rate for the marginal investment … the cutoff rate for equity holders will be the firm's cost of capital …

An Analysis of the Implicit Transaction Cost of Shenzhen A-Stock Market Using Bayesian Gibbs SamplingAn Analysis of the Implicit Transaction Cost of Shenzhen A-Stock Market Using Bayesian Gibbs Sampling
link.springer.com [PDF]
… the investment decision of corporations was the subject of a conference on 'The Economic War among … 18 Under the same conditions and assumptions the government's implicit cutoff rate for the marginal investment … the cutoff rate for equity holders will be the firm's cost of capital …

Dynamic implicit cost and discount window borrowing: An empirical investigationDynamic implicit cost and discount window borrowing: An empirical investigation
www.sciencedirect.com [PDF]
… the investment decision of corporations was the subject of a conference on 'The Economic War among … 18 Under the same conditions and assumptions the government's implicit cutoff rate for the marginal investment … the cutoff rate for equity holders will be the firm's cost of capital …

Corporate stakeholders and corporate financeCorporate stakeholders and corporate finance
www.jstor.org [PDF]
… the investment decision of corporations was the subject of a conference on 'The Economic War among … 18 Under the same conditions and assumptions the government's implicit cutoff rate for the marginal investment … the cutoff rate for equity holders will be the firm's cost of capital …


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